Obama signs sweeping bank-reform bill into law

Law hikes big bank fees but gives regulators much discretion in key areas

By

RonaldD. Orol

WASHINGTON (MarketWatch) -- President Barack Obama on Wednesday signed into law the most historic shakeup of the regulation of U.S. banks since the Great Depression, placing new fees and limits on the nation's biggest banks, imposing new restrictions on the $450 trillion derivatives market, and crafting a major new consumer-protection division for mortgage and credit-card products.

Dissecting the new bank rulesKey points
in financial reform bill:

New transparency, reporting and capital rules for
derivatives

Liquidation mechanism for big failing banks to minimize
market impact

Combine two bank regulators at the center of the crisis

Create a council of regulators to watch for systemic risk

Give shareholders more power in corporate governance and CEO
pay

Audit of the Fed’s emergency and other lending facilities

"Financial reform is not just good for consumers; it is good for the economy," Obama said at a signing ceremony with dozens of Democratic lawmakers and consumer advocates in attendance. "Passing this bill was no easy task. To get there, we had to overcome the furious lobbying of an array of powerful interest groups and a partisan minority determined to block change."

The approval hands Obama a significant triumph in his effort to rein in Wall Street after the excesses that drove the economy to the brink of collapse in September 2008.

The new law, known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, is named after the legislation's two key sponsors in the House and Senate, the Connecticut Democrat Sen. Christopher Dodd and Rep. Barney Frank, a Democrat from Massachusetts.

New regulations for credit-rating agencies, banks, hedge funds, buyout shops and the $450 trillion derivatives industry are expected to be huge undertakings that will take, in some cases, years to implement. However, the statute instructs regulators to adopt many of the rules quickly, in the next six to eighteen months.

The Securities and Exchange Commission, for example, is expected to be responsible for writing 95 rules, while the Federal Reserve would be required to conduct 54 rule makings, according to the package.

The 2,323-page legislation requires a brand new financial stability oversight council to work with the Fed to have "too big to fail" banks install new heightened capital and leverage limits; it instructs the government to conduct unprecedented, ongoing audits of the central bank's lending programs; and sets up a tough "Volcker Rule" that seeks to limit insured big banks' speculative proprietary-trading activities.

It also will force big banks to mostly divest their hedge-fund and private-equity units over a number of years and establishes a new system to dismantle a failing Lehman-like megabank so its failure doesn't send the markets into a death spiral. Read about the 'Volcker Rule.'

In many cases, such as with big-bank capital and leverage restrictions, the Dodd-Frank Act gives regulators the final say rather than setting hard limits. It is unclear how tough the final law will be until regulators approve the hundreds of new rules required by the statute.

"U.S. financial regulators will enter an intense period of rulemaking ... and market participants will need to make strategic decisions in an environment of regulatory uncertainty," according to a Davis Polk report. "The legislation is complicated and contains substantial ambiguities, many of which will not be resolved until regulations are adopted."

Legislative observers contend that lawmakers were hesitant to impose specific limits on leverage and capital because they didn't want to put U.S. banks at a competitive disadvantage with banks in other major economies.

What's next?

Bank and securities regulators have already begin working behind the scenes on writing 243 rules ordered by the legislation, significantly more than the 16 rules and six studies required by the landmark, post-Enron, 2002 Sarbanes-Oxley Act.

The SEC, for example, is expected to approve a rule giving shareholders more power in director elections in August or September. The agency had proposed the rule in 2009 but was waiting for the measure to be approved in the bank statute before adopting it. The agency contends it already has the authority to adopt the rule but with statutory authority it is more likely to withstand judicial challenges.

The Government Accountability Office is charged to conduct a one-time audit of the Fed's emergency lending programs during the crisis with a report to be submitted to Congress within 12 months of enactment of the bill. The SEC has less than 12 months to adopt a rule requiring hedge fund and private equity managers to register and open up their books to periodic examinations at the agency. These alternative investment advisers need to be registered within 12 months.

New protections for whistleblowers must be approved by the SEC within nine months of enactment of the legislation, including new higher whistleblower payments. The agency needs in that timeframe to issue rules giving whistleblowers an ability to file lawsuits against employers who retaliate against them.

Some measures may take longer to create. The statute sets no start date for a new council of regulators, with ten voting members, which is being created to help set capital standards for big banks and monitor systemic risk. Depending on rules to be adopted by the Fed and other regulators, big banks could have between three and twelve years to divest significant interests their hedge funds and private equity unites.

The Treasury secretary and other bank regulators has roughly two months to set a date for the transfer of consumer protection regulations from existing bank agencies to a newly approved consumer financial protection agency. The new agency needs to essentially be set up within six to 12 months of enactment, but regulators could delay the agencies' formation by six months.

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